A lien is only as good as the property that it attaches to and that can be foreclosed on. So what happens when a tenant fails to pay for improvements to property that its landlord owns? In a May 2021 decision, the Court of Appeals held that the lien did not attach to the landlord’s property because the lease did not require the improvements to be made and the tenant was not the landlord’s agent.
In Architectural Stainless, Inc. v. Karet Projects, LLC, Karet Projects (the “Tenant”) hired Architectural Stainless (the “Contractor”) to fabricate and install kitchen equipment for its restaurant. The restaurant was located in The Mall at Partridge Creek. TM Partridge Mall Creak Mall, LP (the “Landlord”) owned the mall. The Tenant failed to pay for the equipment, and the Contractor recorded a lien for $213,389.20. The question was whether the lien attached to the real property, i.e., Partridge Creek Mall, or the equipment, which the tenant removed. For the Contractor, the importance of that answer was obvious: if the lien attached to the mall, the Landlord would pay. If the lien only attached to equipment that had been removed by the Tenant after it went out of business, there would be nothing to collect.
Unfortunately for the Contractor, the Court held that the lien only attached to the equipment and not the Landlord’s property. First, the Court rejected the Contractor’s argument that the Landlord required the Tenant to install the equipment even though the lease required the Tenant to make improvements so that the Tenant could operate its restaurant business. The Court also rejected the Contractor’s argument that the Tenant was the Landlord’s agent because (1) the lease explicitly stated that the Tenant was not the Landlord’s agent; (2) the equipment was required for the Tenant’s business—not the Landlord’s business as a mall operator; and (3) the equipment did not benefit the Landlord because the Landlord did not want the equipment because it would not have been used by a new tenant.
This leaves contractors in a difficult situation because the relationship between the landlord and tenant in the Architectural Stainless case is relatively common. So what is a contractor performing work for a tenant supposed to do? First, while potential lien claims are not typically the deciding factor of whether to do work, a contractor should at least be aware that there is a risk that a lien for work performed for a tenant will not provide the same security that a contractor has become accustomed to. Second, if possible, obtain a copy of the lease to evaluate whether the landlord is requiring the work so that you can understand the potential risk.